How the $20 rule can help break your credit card addiction

How the $20 rule can help break your credit card addiction
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If you’re trying to break your credit card addiction, try this simple rule of thumb: Anytime your purchase is less than $20, pay cash, not credit.

This simple technique helped save more than 6,000 people over $100 on their credit card bills, according to a joint study by the Urban Institute, Arizona Federal Credit Union and the Doorways to Dreams Fund, a nonprofit financial services organization.

Carrying credit card debt can be one of the most harmful financial habits out there, yet 41.7% of Americans carry balances from month to month, according to the American Bankers Association. When you carry a balance from month to month, not only are you stuck paying additional interest charges but it can also be harmful to your credit score.

RELATED: 5 ways to protect yourself from overspending

Easy way to break your credit card addiction

These groups sought to figure out if people were less likely to carry a balance if they tried one of two strategies: Either they were reminded not to use credit for any purchases under $20, or they received alerts warning them that carrying a balance can add an additional 20% to their purchases with interest.

For the study participants, the researchers chose over 14,000 consumers who carried a balance for at least two months within a six month period. Then they split them into three test groups: one group used the $20 rule; one group received the warnings about accruing interest on debt; and the last group did nothing differently.

The second strategy (warnings about revolving debt consequences) wasn’t as successful, creating no significant changes in spending behavior.

But the first strategy — the $20 rule — made a real impact.

Over 6,100 people used the $20 rule for six months. Over that time, they reduced their balance by an average of $104.20.

The trick to why the $20 rule worked is that it helped people change their spending behavior, said study author Brett Theodos, a lead researcher at Urban Institute. The point of the rule, he added, was to reduce frivolous spending among consumers, rather than focusing on encouraging them to make monthly payments.


It’s those spending patterns — using credit for everything from a pack of gum to a flight to L.A. — that result in high revolving credit balances over time.

“The [$20 rule] was more actionable. It was a very clear target,”  Theodos said.

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Both rules worked better with consumers under age 40 and for consumers who used their credit card most often (10 or more times a month). Theodos said it’s possible that the groups were “more tech-engaged and took more advantage of the emails and web banners in particular.”

The under-40 consumers who tried the $20 rule reduced their revolving debt by $173 on average over six months. Overall, they reduced their debt by up to 5%, according to the study. When using the second strategy (those frequent alerts and notifications) they shaved $160 off their average revolving debt. Study participants in the 40 to 60 age range didn’t see a significant change in balance reduction, however those over 60 did cut back debt by roughly 3 percent.

The key takeaway

Using action-oriented strategies may be a smart way to work your way out of credit card debt. It’s certainly worked successfully for savings. For example, the $5 savings method involves a similar strategy. The idea is to begin saving every $5 bill that you receive. It helped one woman save thousands of dollars over several years.

“Rules, tips reminders, nudges, are really the wave of the future,” Theodos said.

Tips to help you start saving more

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